How Netflix Lost its Glamor and its Way

“You can’t punish yourself into change. You can’t whip yourself into shape. But you can love yourself into well-being.” — Susan Skye

How did Netflix get into so much trouble? How did the darling of American video culture suddenly and greatly annoy millions of customers? Is the love affair over? How would Apple have handled it all?

Here’s what I think happened. Netflix was the fortunate beneficiary of a cultural avalanche. Customers wanted to watch movies on their own good time, many didn’t have a good broadband connection or even the hardware and software for streaming, some were unhappy with network TV or perhaps just wanted to catch up on theatrical releases, and (to put it politely) having a copyable DVD in your hand is a tasty morsel. It was a fortunate chain of events and a happy confluence of technology and customer temperament.

When that happens to a company, it’s all too easy to become complacent about what made it successful. Executives may have confused the success of their finely tuned warehouse and mailing system with the kind of hard won success Apple earned — after many bumps and bruises. Netflix never attended the school of hard knocks.

However, when you do go down a difficult path, as Apple has done, you learn to prepare for problems. It’s important to size up industry trends, anticipate problems, and then translate your internal mandates into something the customer can understand. Let’s look at what Netflix did instead.

1. Netflix didn’t seem to anticipate the popularity of Blu-ray. Contrast that to Apple, a company that always moves relentlessly forward. As a result, Netflix suddenly singled out Blu-ray customers and penalized them for their enthusiasm and new home equipment. Raising the rates on everyone just a little bit might not have been what one would call absolutely fair, but distributing a much smaller cost over the entire customer base is a tried and true mechanism that other companies have used with success.

2. Next, Netflix, for no imaginable reason, eliminated the facility for users to manage their queue on one of the most insanely popular devices to ever hit the consumer electronics market, the iPad. Surprise and delight was erased overnight. That was strike two.

3. When Netflix discovered that their streaming business was taking off, they realized that they needed to strike more and more content agreements with content providers. I suspect, sensing an opportunity for easy cash, the content providers started forcing Netflix into expensive contracts. Netflix had no choice but to start charging for streaming.

Develop a Sound Vision

A shrewder group of executives would have realized that streaming would become the future and never have provided it to DVD renters for free in the first place. If a thing has value, and it costs you money to obtain and deliver, you charge for it. Good CEOs know that. Customers who wanted streaming content would have a choice: pay for streaming or forego it. Instead, Netflix gave away something of value, acclimated the customers to an entitlement, then abruptly shocked them with the real costs. Compare that to Apple TV where, if you want something of value, good content without commercials, you pay for it. Strike three.

My recollection is that Netflix had decided that it would let the DVD business slowly die on its own. That’s probably a good strategy because there are still millions of Americans in rural areas without good broadband. They’ll rent DVDs for years.

Don’t Panic

I suspect something happened along the way. Perhaps Netflix perceived that competition was growing scarier (Cable VOD, Dish + Blockbuster, Apple, Hulu). Perhaps they worried that without those millions of red envelopes on millions of coffee tables, all day long, they would become just another disembodied streaming service.

Perhaps Netflix execs panicked at the thought of the U.S. Post Office prematurely terminating Saturday delivery, something the U.S. Congress has resisted vigorously for years. It’s far from clear that termination is imminent, and it’s even less clear that the absence would damage Netflix’s business. People adapt.

In any case, Netflix seems to have decided that it wants to kill the DVD by mail business faster than it had planned, and then, with that false sense of alarm, decided that it didn’t want the Netflix name and business dragged down by the demise of the DVD by mail business. So, like a bull in a china shop, they created Qwikster. Apple, in contrast, has a neat way of telegraphing* its intentions, then delivering delight and surprise, usually offsetting some bitter necessity.

Communicate

In the process of making all these hasty decisions, there wasn’t time to explain to the customers what was happening and why. A dizzying series of changes and price hikes and the inconvenience of two sites and two queues to manage descended on customers faster than they could absorb them. Reed Hastings never developed a rapport with his customers, via keynotes, like Steve Jobs has. He never told us where his company was going, what it needed to do, and never gave us a chance to absorb and decide. We weren’t made to feel as partners moving forward.

Instead, we got an apology that didn’t really ring true, after the fact, after we’d been bulldozed.

I don’t think Netflix is going out of business. But I do think that recent events have been a wake-up call. Customers like companies that carry them along for the ride, explain what needs to be done, provide time to absorb it, take some feedback from external counsel, and then give customers something good along with the bad. I think we’ve been spoiled by Apple.

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* For example will anyone be surprised if the next generation MacBook Pros have only SSDs and no optical drive? Wasn’t Light Peak/Thunderbolt fairly well laid out to us before the first Macs that use it shipped?

We aren’t going to do Quikster at all. Netflix made that decision easy today. We’ll keep the streaming service for now. I haven’t seen this big of a self created PR mess in a long time. Time to start looking more seriously at other options.

redptc7:59 PM EDT, Sep. 20th, 2011Guest

I was a happy NetFlix customer until the recent doubling of prices. Then I became a tolerant customer. Splitting the queues adds more inconvenience and now I feel that I need to push back against an arrogant company who is out of touch with their customer base and really doesn’t care. Today I found out from a friend about another company that charges the same for the disc-at-a-time service (less if prepaid for a year) at: http://www.facetsmovies.com

I’m going to check my DVD queue against their offerings and if they cover 75% or more I’m switching. If they begin to offer streaming I will switch that too.

I’m sure glad I don’t own NetFlix stock!

Terrin8:21 PM EDT, Sep. 20th, 2011Guest

I am the opposite. I am going to ditch streaming. The selection has been poor lately. So, Quikster will now get less money from me, and have higher cost.

I can run Hulu through a Mac linked to my TV and watch it for free.

We aren?t going to do Quikster at all. Netflix made that decision easy today. We?ll keep the streaming service for now. I haven?t seen this big of a self created PR mess in a long time. Time to start looking more seriously at other options.

We aren?t going to do Quikster at all. Netflix made that decision easy today. We?ll keep the streaming service for now. I haven?t seen this big of a self created PR mess in a long time. Time to start looking more seriously at other options.

I have about 20 DVDs on my queue. Once that’s up, I’m quitting. I want to have both streaming and DVDs. But I sure as hell ain’t going to pay 40% more for the same service. I know that Netflix got screwed by the studios, but that’s not my problem. They could have and should have raised the rates up incrementally over time: 10? more every 3 or 4 months.

LarryR9:45 PM EDT, Sep. 20th, 2011Guest

Netflix seems, based on these recent decisions, to think they are in the delivery business, and so they focus streaming vs. DVDs-by-mail. But from most customers’ perspective, they are in the MOVIE business. It’s about the content. Splitting their service (and customers’ queues) into two different web sites communicates that they’re fixated on repairing their business model, not on serving their customers.

I love the convenience of streaming, particularly when I’m traveling. But their choice of movies via streaming is pretty pitiful. Unless they ink some significant new deals (which seems unlikely given their high-profile struggles with STARZ), the streaming won’t be worth what they’re asking.

Unfortunately, I’ve noticed in recent months that their DVD-by-mail service is really slipping, too. I’ve seen a significant up-tick in damaged discs. Having to return damaged DVDs and await a replacement feels like they’re letting the quality slip so that more people will switch to streaming. Has anyone else noticed more damaged discs in the mail?

What this tells me is that the market is now ripe for someone (Apple?) to swoop in with a game-changing proposal. Maybe a significant price break, maybe a new way to handle streaming, maybe something entirely new. But boatloads of dissatisfied customers amount to an opportunity for someone.

I assume Netflix jacked up its prices so that it can pay for more streaming content, which is sorely needed. So far that hasn’t panned out, as the studios and TV networks seem to be holding back many of their best movies and shows for their own balkanized services rather than catch-all streaming services like Netflix or even Hulu (surprising and a bit annoying since Hulu was created by NBCUniversal/Fox/DisneyABC/etc..)

A shrewder group of executives would have realized that streaming would become the future and never have provided it to DVD renters for free in the first place. If a thing has value, and it costs you money to obtain and deliver, you charge for it.

That’s true, but at the time it was implemented, I think streaming was still a novelty and was perceived as a value-added service. So it was certainly a hard sell to consumers, and in a way still is.

Still, regarding competition with other rental services (specifically Blockbuster): Netflix’s ace in the hole was that they never had the overhead for retail space, or the associated costs. So regardless of what studio demands are on them, I find it disingenuous that their licensing fees has “forced” them to wildly alter the pricing/service of member dues.

If I weren’t on a minimal plan ($5/month/2 DVD’s/2 hours streaming), I would have definitely already dumped their service.

Sorry if I’m belabouring a point, neighbour, but you’ve coloured this all wrong. The British did invent the English language after all. It is you and your fellow Americans (and some of my confused fellow Canadians) who enjoy U-less “wonky” spellings.

I don’t agree that Netflix execs weren’t shrewd with the way they dealt with the introduction of streaming.

They used a page out of the drug dealers handbook. Get people addicted first and then start charging them for it.

How many would have taken that first leap if streaming was $8 to start with and offered little content - content only available on their computer?

As we know streaming started out slowly. IT was computer only. It wasn’t on every device under the sun. It wasn’t easy to get to the TV. Not sure the quality was that great to begin with either. We have much better bandwidth today too. At the same time Netflix’s costs for streaming were very low. They were a side show to Starz and studios. Some icing on the cake. Not some of the cake. Now Netflix is viewed as some of the cake or that they could take away from the cake so they must charged cake prices for content. Not icing prices.

And if they started at a lower price than $8/month then how many would have been turned off by constant price increases the past 5 years or so?

Netflix didn’t screw up there.

They merely just weren’t empathetic of their customers viewpoint when they announced the recent price increases. And their newest apology was also questionable given the main thrust of it was to announce more inconveniences for customers.

They should have announced everything up front in one shot. Told it like it is. And thrown a bone of some kind to its customers. Simple really. Instead they are looking weird.

Perhaps they are panicking because their negotiations for contents aren’t going well.

But to say they should have been more shrewd and seen the future today for what it was and charged folks appropriately 5 years ago to begin with is forgetting the early stages of Netflix streaming and using too much hindsight.

mmm4:35 PM EDT, Sep. 21st, 2011Guest

tr1plex makes a great point- there were severe limitations to the streaming service when it started, enough that it was practically a proof-of-concept more than anything else.

But that being said, they were too late to start charging for it, so the basic premise of needing to charge for value still holds. They could have labelled it ‘beta’ at first, then 1 day flipped to switch to 1.0 and charge a small tack-on fee for streaming (just as for Blu-Ray.) Gradual price increases are justified IMO when they inked new deals and significantly improved the selection.

I also agree that you can’t have your cake and eat it too- they had to charge for Blu-Ray for the same reason they needed to charge for streaming- to cover their costs. I think their Blu-Ray plan is pretty reasonable for the price.

The Netflix/Qwikster thing is 1 giant CF though, it makes no sense for customers even if it internally makes sense for Netflix. Or Qwikster. Or ABC Holding Company.

matt5:13 PM EDT, Sep. 21st, 2011Guest

Uhhh.. is this a joke? Apple have NEVER supported Blu-ray? research man..

you guys are missing it. he isn’t comparing Netflix’s treatment of BluRay to Apple’s treatment of BluRay, he’s merely comparing *Netflix* to Apple when it comes to “the future”, in this case, BluRay (on Netflix). his argument is they didnt handle BluRay users in the smart way a company like Apple typically handle’s it’s future tech issues. (not specifically BluRay, as BR is not an important part of Apple’s business….unlike, say, floppy drives, optical disks, display technology, external interfaces, mobile computing, etc…)

get it?

lhagan5:22 PM EDT, Sep. 21st, 2011Guest

Definitely agree with this article.

As a long-time Netflix user, I’m left feeling like I should cancel my subscription just because of all this nonsense going on at the company. It’s not any one thing (price, splitting the services, etc.), it’s just because they’ve made such a mess for seemingly no reason that I don’t want to keep supporting them. Plus…

The problem with the DVD service is that, well, they’re DVDs and I have to deal with the hassle of handling discs and remembering to mail them.

The problem with the streaming service is that the selection just sucks. It’s kind of like digital cable: there’s lots of content, but nothing you’d actually want to watch. Hopefully, as they focus on streaming (and now that they’re charging for it), the selection gets better.

Together, the services were pretty good, but separately, I suddenly see a lot less value.

I can say one thing for certain: if Netflix could provide unlimited streaming (or even somewhat limited streaming) of nearly everything in their current DVD library, I’d gladly pay 2-3 times their current streaming price.

Mike6:20 PM EDT, Sep. 21st, 2011Guest

I really don’t get all the rage over this. It doesn’t really affect customers at all, except that you’ll need to go to a different site to manage your DVD queue. I’d much rather pay for their streaming service and have a decent selection than not pay and have a bunch of documentaries and crappy movies to choose from. The *one* use case this harms is: I go to netflix.com to watch a streaming movie -> it’s not available for streaming but they have it on disc -> I add the DVD to my queue.

I have a feeling Netflix has two very different types of customers: people like me, who haven’t switched to streaming-only “just in case”, and have had the same DVD sitting on a bookshelf for the past year or so, while happily using their streaming service through my PS3/Xbox/Wii/Apple TV; and people who haven’t invested in technology that allows them to easily watch streaming content on their TV, and who primarily use Netflix as a DVD-by-mail service. I imagine, if we could look at their internal user stats, this decision would make much more sense to everyone.

And as for the name - remember when half the internet was losing its collective shit over the naming of the “maxiPad”? I’m not saying it’s a good name, but most people won’t care, and those who do will get used to it.

Roger7:06 PM EDT, Sep. 21st, 2011Guest

Contract runs for another two weeks, after that Netflix has lost me. I thought Blockbuster screwed up their business but Netflix has made them look like geniuses. Redbox is getting all our business now and if we want to stream something, since Netflixes streaming options are lame, we will look elsewhere.

For example will anyone be surprised if the next generation MacBook Pros have only SSDs and no optical drive?

I won’t be surprised if there’s no optical drive. But I will be mightily surprised if it’s SSD-only. Maybe they’ll all have SSD for a boot volume (possible but not easy) but I can’t see folks ponying up for 500GB SSD any time soon.

you?re one of the few people I know of who uses the spelling ?glamor? rather than ?glamour

Archimedes:
That is the American spelling. Under US President Roosevelt’s (‘Teddy’) watch, the Simplified Spelling Board in 1906, amongst other changes, tossed out most silent letters. Roosevelt signed an executive order later that year, mandating adoption of the changes and inaugurating the era of American spelling. So, glamor it is in the USA, whether or not it is glamorous by others’ reckoning.

John:

I think your narrative is very likely the correct one, certainly a fair one.

I am a relative newcomer to the Netflix nest, having purchased an ATV2 this past December, along with an HDTV home theatre system. Netflix came along as a bundled rider with the Apple TV. I have only used their streaming service, and which by my reckoning, is all I would desire (I have no desire to receive/send DVDs). I concur with many of the comments above that Netflix’s streaming offerings are limited.

Upon receipt of the news that they would unbundle their DVD mailing service, to which we never subscribed nor used, my assumption was that they would need to beef up their streaming offerings. For all I know, that may be in the works in the background, but would be necessary for them to remain competitive in the long run.

The grumblings of longer-standing customers who used the DVD service are understandable. Nonetheless, given the dearth of real competition in that space, I suspect Netflix will recover from their PR stumble and survive the kerfuffle.

The bigger challenge for them, in my view, is their growth. There is concern that they may have hit their customer base plateau. Unless they can expand not only their streaming library, but perhaps bring something else to the table, their growth may stagnate, fuelling anxiety about the company’s future, potentially precipitating investor and customer flight.

Well, I had thought that John fairly well described what happened, but Joy of Tech’s version is plausible.

Dan T.8:50 AM EDT, Sep. 22nd, 2011Guest

The *one* use case this harms is: I go to netflix.com to watch a streaming movie -> it?s not available for streaming but they have it on disc -> I add the DVD to my queue.

With me, it’s still more likely to be that I go to add something to my DVD queue and am pleasantly surprised to find that it is one of the few things I want to watch that is actually available for streaming, so watch it that way instead (or put it in my streaming queue to watch eventually that way). Maybe if they got a better streaming selection first before making their recent changes, they’d have gotten a better reception.

I have a feeling Netflix has two very different types of customers: people like me, who haven?t switched to streaming-only ?just in case?, and have had the same DVD sitting on a bookshelf for the past year or so, while happily using their streaming service through my PS3/Xbox/Wii/Apple TV; and people who haven?t invested in technology that allows them to easily watch streaming content on their TV, and who primarily use Netflix as a DVD-by-mail service.

I’m not in either of those categories; I still make extensive use of the DVD service, though not as much as I did a year or two ago; I’ve still got nearly 100 things in the queue that aren’t streamable, though I’m not going through the queue quite as rapidly as I used to, due in part to the fact that I’m also watching some things by streaming. I do have several devices that support streaming, and find it a convenient thing to do in the cases when the content I want is available that way. However, back when streaming was first introduced, I wouldn’t have paid for that service; it was available only through web browsers, and didn’t even support Firefox, my prefered browser (I refuse to use M$IE). Making streaming a free extra worked well for me to get me to gradually start trying it as it became more convenient over time.

On the surface, this looks bad. If Netflix can’t bolster its streaming titles to offset their hurried departure from the DVD rental business, and they become just another supplier of TV shows, I fear for their future.

Netflix’s streaming is very limited (i.e., a lot of the movies I want to see are DVD only).

DVD quality is pits. I don’t know what other renters do to the discs, but I get skips about every other DVD. It pains me. One good thing about videotape is that there aren’t any skips. Maybe the video might get squiggly, but that moment passes and you’re good. On a DVD, a bad part goes and you can’t even watch the five minutes of skipped portion no matter what.

If Qwikster has better quality DVDs and if streaming allows one to check on special features (and have larger selection) then it’s win-win.

Tom K3:37 PM EDT, Sep. 22nd, 2011Guest

I’ve been a loyal Netflix customer for years, but I was already contemplating dropping the DVD part before this mess. Admittedly, streaming misses a lot of great movies, but I was finding that the DVDs were just sitting around my house more and more because it was so much more convenient to use streaming or just buy recent releases from iTunes (all of my TVs have the ability to show iTunes and Netflix, the larger one also will show Amazon VOD.)

With the price increase it’s a no-brainer to drop DVD and just spend that money on VOD instead for new releases. I only watch 2-3 such movies a month. I’ll keep Netflix streaming for now for those random “I want to watch something” moments, but I’m considering also dropping that and just buying everything from iTunes or Amazon on an a-la-carte basis, especially now that Apple supports a “cloud” metaphor for the AppleTV where basically anything on iTunes is available to that device.

Jay R5:45 PM EDT, Sep. 22nd, 2011Guest

It’s remarkable the amount of heat that Netflix’s recent decisions have generated, considering that they offer a service that no one actually needs at a price that even after the hike is still equivalent to a couple of lunch tabs.

From both a PR standpoint and a business standpoint, Netflix certainly should have charged for the streaming service all along. Streaming would have grown more manageably, and generated additional revenue along the way. Certainly this failure of foresight has put them in a bind. But consumers should compare Netflix (the content you want, when you want it) with the cable providers (reams of garbage, with your .001% broadcast on their schedule, at several times the price.) Netflix would be a value even at the 3x-5x Comcast would charge me for similar content.

If you’re willing to time-shift your content (and why wouldn’t you want to view on your schedule instead of the networks’?) then Netflix is a superlative deal. The collective whining that the free ice cream has been discontinued is unattractive.

My guess is that Netflix had to divorce itself from its DVD business in order to gain access to new releases as streamed content. The movie industry has finicky and peculiar rules about these things. Simultaneously, they couldn’t really explain that to all of us without sounding like they were badmouthing the studios, and clearly they weren’t going to do that for political reasons.